Energy, Environment, and Economy

Coal accounts for over 70% of China’ energy mix, whereas in the United States, coal is 44% of the energy mix. Below I analyze several reasons why China has such high coal requirements as a percentage of its energy supply and I attempt to explain why China’s coal requirements may remain high for a long time to come.

Just how fast are China’s coal demands rising? According to a study, “offsetting one year of recent coal demand growth of 200 million tonnes would require 107 billion cubic meters of natural gas (compared to 2007 growth of 13 BCM), 48 GW of nuclear (compared to 2007 growth of 2 GW), or 86 GW of hydropower capacity (compared to 2007 growth of 16 GW).” (Lawrence Berkeley National Lab. Study)

(See Part One of this series on China’s Coal and a chart comparing China’s energy use to the United States’ Here).

China has trouble diversifying energy supply sources because it lacks significant natural gas supplies, it is starting from a very low base in installed nuclear power plants, and because of other renewable energies’ technical limitations.

1. China’s Lack of Extensive Natural Gas Supplies

Natural gas provides over 20% of US energy, but China has much less natural gas reserves than are available in the US. The US has 79 trillion cubic meters estimated natural gas reserves, whereas China has 22 trillion cubic meters. (EIA). Natural gas only accounts for 3.5% of China’s total energy supply and it is unlikely that Chinese natural gas utilization will increase to anywhere near the levels that it is used in the United States.

Natural gas generally burns cleaner than coal, so use of natural gas is desirable from both a carbon and a sulfur emission point-of-view. “[I]n 2011, China [hopes to]… raise the ratio of natural gas in its total primary energy consumption by 1 to 2 percentage points. . . . Using natural gas … as opposed to coal, could reduce carbon dioxide emissions by 130 million tons a year and sulfur dioxide emissions by 1.44 million tons a year.”( China’s LNG.)

Still, much of China’s natural gas has a high sulfur content, which makes it expensive to produce in a usable, or clean form. However, unconventional gas reservoirs may increase China’s future output. Not all unconventional resources, however, are included in estimations of producible reserves (such as those given above). “[L]ow permeable gas, coal bed methane, and shale gas are each respectively estimated at 100 trillion cubic meters, 30 trillion cubic meters, and 100 trillion cubic meters.” (China Coal Resource, Sept 2009)

Even fast-increasing development of unconventional gas resources will only marginally affect coal’s dominance of China’s energy supply. A 2005 Oxford study determined that “the share of natural gas in the primary energy supply is predicted to rise no higher than 10 per cent by 2020, even in the most optimistic scenario in which natural gas use is significantly promoted.”

Realizing that its domestic resources may not be enough to guarantee sufficient natural gas supply, China has also planned natural gas pipelines to surrounding countries to import gas. China also constructed several LNG (liquid natural gas) terminals (The Guardian, Watts, 2006; see also p3 Oxford Energy Study for a map of planned LNG terminals as of 2005).

(A more in-depth study on the future of China’s natural gas industry is deferred until another article).

2. China’s Coming Nuclear Additions

Nuclear accounts for 20% of US capacity. China has plans to increase their nuclear capacity from ~1.3% of China’s current energy mix to 5% by 2020. Despite plans to construct the most nuclear plants of any country in the upcoming ten years (and subsequently demanding a great deal of uranium), China will find it difficult to quickly displace coal’s dominance of China’s energy supply.

The United States has over 104 nuclear reactors, built over a thirty-year period. Prior to 2002, China had less than three operating nuclear power plants. Today, China has 11 nuclear facilities and plans to construct at least 20 in the next 10 years. But even with a significant building program, it may not be in China’s energy security interest to rapidly increase its percentage of nuclear power. If a massive nuclear-buildout occurs, large quantities of uranium will need to be imported, and engineers will need to be rapidly trained. A more gradual increase in nuclear capacity may be in China’s best interest rather than a break-neck development speed.

3. China’s On-line Wind Capacity And Renewables

Wind and renewables have steadily increased as a percentage of China’s energy mix, rising from 0.06% of China’s energy mix to 1.3% from 2006 to 2008. Additionally, hydroelectric power capacity has grown significantly in the past three years. “In 2008, the country added 20.1 GWe of hydro capacity” (World Nuclear Ass.)

There are limits to how much any country can depend on renewables, however. Engineers I have spoken with claim that an energy grid can only handle a maximum of around 25% of its power from wind. Wind is a variable source and needs scaling units (other energy sources that can turn on when wind is not blowing) to balance wind’s output. Wind’s average capacity utilization factor is only around 31%. In comparison, Combined Cycle Gas, Nuclear, and Coal steam turbines all rated capacity factors above 40%, according to the Nuclear Energy Institute.

Given current technology, at the most, wind could only account for about a fourth of China’s energy mix- and subsequent developments in battery storage or natural gas scaling units are required to make wind economically viable and reliable. (See China’s Dirty Wind for more on wind and scaling). (See “Capturing the Wind” by the House Research Organization for the Texas House of Representatives for an estimate of the maximum amount of wind that can be integrated onto the grid using existing technology without radical alterations– 15GW; as of 2007 Texas already had nearly 5GW of wind online- which was only about 2% of the state’s energy supply.)

4. Hydroelectric Power

Hydroelectric power has been met with some controversy in China. Although there are environmental concerns, property takings concerns, and rainfall has declined, hydroelectric has a lot to offer China. Over 37 GW of hydroelectric capacity was added in China between 2004 and 2007. An additional 20.1 GW of capacity was added in 2008. China’s total potential hydroelectric rating is one of the highest in the world- at 694 GW. However, only around 171.5 GW of China’s capacity is utilized. China hopes to reach 320 GW of installed hydroelectric capacity by 2020 (Huang, 1658).

Of all potential alternatives to Coal, hydroelectric power will likely remain the number two energy supply source. Hydroelectric power has also done a great deal to reduce the amount of ash, sulfur dioxide pollution, and carbon dioxide emissions.

Conclusion

Although China’s coal consumption is double the number two producer’s amount, China seems to have little other viable options to displace coal as an electricity source in the near term.

China is embarking on ambitious wind and nuclear development programs, and it has built pipelines for natural gas, but these programs take time to develop, and there are drawbacks to all alternative energy sources. Even massive hydroelectric expansions have resulted in environmental and land-relocation controversy (See articles on the Nu River Project and the Three Gorges Dam; specifically see the book China’s Water Warriors by Andrew Mertha).

Coal will likely continue to provide a significant portion of China’s energy for the next 20 years– simply because the alternatives are not practical enough to scale-up large enough to replace coal’s necessary position in China’s energy mix.

These next few years will bring large challenges for China’s leaders as they try to balance energy security, energy demands, resource depletion and environmental concerns. With luck, China’s leadership will use constructive and creative solutions to manage and confront these growing concerns.

With its new Food Safety Law that went into effect on June 1st, 2009, China has edged closer toward an “Americanization” of its tort law system (at least in the Product Liability area). China has given a little more power to people who file lawsuits. The incremental changes in this particular law which allows greater monetary recovery; however, probably does not signal a near-term shift in China’s general attitude toward permitting recovery of higher sums in other sorts of tort law litigation.

China’s Tort Laws have been in semi-serious revision since around 2002, and have been through numerous drafts. (See 2002 draft translation; and a 2007 discussion.) One of the proposed drafts “doubles the [currently used] 1986 Code tort liability provisions from thirty-four articles to sixty-eight articles, which * * * state basic principles of tort liability.” (Conk, 937 ; 2007)

Whether or not “tort reform” in China (I.E. making it easier to sue and to recover more in damages) is necessarily a positive development or not is debatable, but it does seem that the trend in China has been to grant more power and recovery for individuals in certain circumstances.

China’s new Food Safety Law appears to demonstrate an intention to get tough on public health violations. The Food Safety Law allows harmed consumers to claim higher punitive damages. “In addition to a compensation covering the damage they have suffered, [customers may claim] damages up to ten (10) times the purchase price of the product in question from the relevant manufacturer or seller.” (DLA Piper; additionally the law imposes more severe penalties against manufacturers and sellers, permitting criminal liability, confiscation of unlawful gains and property, and fines ranging from 2,000 RMB to 5-10 times the value of the defective product.)

Class action lawsuit reform which would make it easier for class action lawsuits to form, appears to be on hold. Although a class action suit was filed in January, the suit has not yet been accepted. The first individual lawsuit against a melamine-injecter was only accepted in Hebei in March. To date, no class actions have been accepted against any actor involved in the melamine scandal. And class action lawsuits related to the Sichuan earthquake have also been rejected. (A more indepth study of class action lawsuit reform may be warranted at a later date).

Punitive Damages and Government-Based Compensation

Generally, the Chinese government is adverse to mass tort claims and it tends to rely on government-directed fines or state compensation to achieve the same ends that are achieved in American class action suits (Green, 152). Fines and government-directed compensation levied against Sanlu helped cause the firm to go into bankruptcy. (Also see: China milk firms ‘to pay victims,’ BBC, Dec. 27, 2008 ; demonstrating the government-fine system). In the wake of the Sichuan earthquake, Chinese local governments preferred to settle claims and give compensation rather than go to court. And indeed, few if any earthquake-related cases, have gone through trial.

[Also see an article on Xinhua that concerns possible updating of the state compensation system].

Conclusion

It is interesting to see the Chinese government taking a step back from government directed and centralized compensation policies and permitting lower courts to hear individual cases (at least one), and permitting higher recoveries on punitive damages.

Over the next few months as the case(s) wind their way through courts and the courts respond to societal pressures we will be able to see if there is any pending tectonic shift in the way that China practically handles tort law product liability cases. Although the law has “liberalized” somewhat, what really matters is what goes into practice- and a verdict on that will have to wait.

George W. Conk, A New Tort Code Emerges in China:An Introduction to the Discussion and a Translation of Chapter 8 – Tort Law of the Official Discussion Draft of the Proposed Revised Civil Code,” 30 Fordham Int’l. Law Journal 935 (2007).

Chinese national banks’ regional and provincial branches are audited by the state, and many state employees consider anti-corruption missions quite seriously. But to some degree, Chinese companies suffer from significant systemic corruption.

A Chinese friend served an internship over the Summer with the financial auditing arm of a provincial government. She worked on a team investigating a Shaanxi branch of a national Chinese bank’s accounting books. The team found several irregularities in the numbers, and they reported to their supervisor, who confronted the bank’s director.

The director offered to take the team to dinner and discuss the matter. He offered to pick up the check. My friend’s superior accepted and they ate, drank and discussed. The director argued that the misplaced amounts were inconsequential, somewhere around 7000 USD. He tried to convince the team to overlook the transgression in return for “help” and “benefits.”

The superior declined and the bank was fined. The director kept his job since the amount misplaced was only a “mistake” and the bank director was a “good man” who had long served. China’s system of friendship among bank officials almost guaranteed that unless the crime was disproportionately large, little negative attention would be fostered on the wayward director.

When asked what she felt about this situation, my friend seemed nonchalant. She stated it was common for bank owners to embezzle but she still admired her superior for being so “driven” in achieving his objective. She said most supervisors would probably have taken a bribe. Afterward, her team discussed the tragic situation whereby bribery and corruption are considered the status quo. They recalled their supervisor’s lament that although he always tried to quash corruption, his plans were often flummoxed. He annoyed too many in his bureau due to a “righteous” mentality, and was overlooked for promotions. He feared he could never move to a provincial-wide managerial position. Instead, for his efforts, he was stuck at a mid-level job, where he could be overruled if political considerations superseded a need for economic honesty.

China disciplined 115,000 Party members for corruption in 2005, and has dealt with an “average of 130,000-190,000 Party members each year for various types of misdeeds and crimes since the early 1980s,” according to Minxin Pei of the Carnegie Endowment for International Peace. For various reasons, “24,000 of the Party’s 68 million members” were expelled from the Party in 2005, according to Edward Cody of the Washington Post.

The country could have grown even faster without the stultifying effects of late-1990s corruption. According to Chinese economist Hu Angang, cited by Will Hutton in The Writing on the Wall, the annual cost of corruption “is between 13.3% and 16.9% of China’s [potential] GDP.” Admittedly, that number is difficult to believe and I would like to see it backed up by another independent evaluation. Still, when confronting the anecdotal evidence and the recent Gome and real estate scandals, it is not too difficult to perceive millions of RMB flowing where it should not.

My friend’s view of corruption is a common one, and she could not say she would refuse a bribe if it had been offered to her. The bank director was a powerful man and held lots of influence. Without protection, she may not dare confront such a man. She admired her heroic supervisor, but wondered whether she could emulate his courage.

Positively, the number of prosecuted corruption cases has risen in recent years. But negatively, many former Party and government members have “jumped into the sea” of business, and used government connections to flout laws, “grease wheels,” and avoid bureaucratic regulations.

Without a reevaluation and a recognition that everyone is equal under the law and none are more “equal than others,” people like my friend will hesitate in acting honorably and working against corruption. Eventually, they might do the right thing and oppose corruption, but without a change in its culture of privilege, China could face a very stormy and increasingly corruption-filled coming decade.

It is far beyond the scope of this article to evaluate various countries’ approaches to fighting corruption. Corruption seems to be present everywhere in the world. Every few years the United States suffers something along the lines of an Enron, a Tyco, or a Bernard Madoff scandal; Germany suffers a Siemens scandal, Korea suffers a Samsung scandal, and so it goes ad. infinitum.

Note: This article was originally written in January 2008, and was recently updated.

Models employed by IEA, the Chinese Government, and the United States Department of Energy estimate, quantify, and predict China’s future energy demands. The estimates range from lowball numbers to significant over-estimates. 2008’s wild swings in commodity prices demonstrated the difficulty of predicting international energy markets. Exponential energy growth models significantly overestimated China’s demand, and a 1996 model failed to predict China’s torrid pace of growth. The methodology behind the World Economic Outlook’s (WEO) predictions have closely tracked reality for the past four years. The WEO provides perhaps the most useful framework for understanding China’s future crude oil demand.

China’s year 2008 crude oil production, at 189 million tons, was the country’s highest ever. China’s oil imports also soared to record levels, at over 164.51 million tonnes imported through 2008’s first eleven months (AFP). Still, China’s oil demand appears to have slowed in 2008’s fourth quarter. Oil is currently 21 percent of China’s energy mix. Yearly, China’s oil imports increase by 5-10 percent. Increasingly, oil gains in importance as part of China’s energy security strategy. Correct models of China’s future energy demands may make China’s future economic and political goals more understandable. Below, three energy demand models are examined and are followed by a data-table.

China’s future energy demand has been difficult to predict. Models, such as Ramirez, Alvarez and Rodriguez’s (below) depend on exponential growth patterned on prior returns. An exponential growth graph fails to capture nuances of human nature and account for plateauing of demand after an optimum supply-level and equilibrium price is reached. At some point, every society becomes “built out” and its growth slows. Accompanying the reduced GDP growth, crude oil demand likewise declines. Ultimately, exponential growth predictions that do not incorporate an eventual plateau will tend to over-estimate growth.

Exponential models of increased oil demand help provide some answer to the mystery of this summer’s rise to $150/barrel oil. Ramirez’s 2005 prediction of Chinese energy demands in 2010 requires an equilibrium crude price of greater than $120 bbl. Under the Ramirez scenario, China’s requirements rise from 7.6 million barrels a day to 11 million barrels of oil a day in 2010. Even with consumption at 7.6 million barrels a day, China still ranks second highest in world demand to US consumption of 20.68 million barrels a day. If China’s middle class, its economy, and its car culture threaten to grow to US, Japanese, or European levels of consumption per capita, then the world’s oil production infrastructure will be put under a mighty strain.

Moderate Growth Model (China Energy Strategy Study- 1996/CSIS 2003)

In 2003 the Center for Strategic and International Studies (CSIS), presented and commented on the 1996 China Energy Strategy Study’s predictions for China’s energy demand growth. The China Energy Strategy Study significantly underestimated future target figures. The Energy Strategy Study’s predicted energy demands were made before China joined the WTO. The predictions appear to have expected 6-8 percent GDP yearly growth. In contrast, the years 2003-2008 posted near-consistent yearly double digit GDP growth.

The Most Applicable Model for the Near-Term Future (WEO- 2004)

Of the three models for Chinese oil growth, the one with the best track record appears to be the 2004 World Economic Outlook prediction. Although the WEO revises its estimates slightly higher each year, the 2004 and 2006 WEO methodology gives the best model of future Chinese crude oil industry growth.

The WEO’s “reference scenario” also likely does not overestimate China’s crude energy demand. Although the global automobile industry is currently in a retraction period, the annual arrival of hundreds of thousands of Chinese to the middle class presages a continued demand for automobiles and petroleum. Although US car sales plunged an average of 25 percent each month from September through November; Chinese automobile sales in November were only 3.2 percent off from the previous month (China Daily). Still, a sharper drop in Chinese automobile sales could be coming. To prevent that drop, the Chinese government offers valuable incentives for trading in cars (China Daily). Chinese GDP however, is still likely to grow at 6-8 percent in 2009, and as long as oil remains below $120 a barrel, there will be a significant number of citizens who reach the wealth threshold where it makes sense to own and purchase gas for a private car.

– Past experience is no guarantee of future returns, as world stock market investors learned to their chagrin in 2008. The WEO estimates appear to offer good insight into the future, but has the paradigm changed? (Feel free to respond in the comments.)

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Appendix:
Actual crude oil demand and future projections given by various sources, including the above-mentioned models.

* Note on converted numbers: There may be some variations between actual amounts and reported amounts. Some “actual amounts” such as the BP and CBC data differ slightly, but by no more than 15 million barrels in any year. In all cases below, I have converted barrels/day to m. tonnes of crude/year. I identify where I convert numbers.

Total Crude Demand (Estimates and Actual)2050- 520 m. tonnes of crude (1996 Prediction- Barring aggressive adoption of renewable energy or a decline in Chinese standards of living, this is vastly underestimated.)

(*”PetroChina, like many European oil companies, measures its output in tonnes instead of the US standard of barrels.”)

Other Sources:
– Gill, Bates and Matthew Oresman. “China’s New Journey to the West: China’ Emergence in Central Asia and Implications for U.S. Interests: A Report of the CSIS Freeman Chair in China Studies.” Center for Strategic and International Studies. Washington, D.C. August 2003. 25. [Analyzing the 1996 China Energy Strategy Study].

China Comment plans to return to its regular schedule of 1-2 articles a week in mid-December. Currently, in my free time, I am catching up on some China-related academic reading material. If you have suggestions of particularly insightful recently published Journal articles to peruse, I would much appreciate the advice. Thank you for reading.

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I agree China will only see 8-9% growth in 2009, which is less than its previous trend of double-digit economic growth; however, this slowdown will not be disastrous- in fact, it may be beneficial. Only a few months ago analysts complained how China was growing too fast, how inflation was hurting the economy, and how highcommodity prices were thrashing China’s consumers, and how the government’s artificially cheap energy market was crippling China’s energy industry.

Now, commodity prices have descended, along with $65 and lower/barrel oil. And that is highly beneficial for China. If prices for steel, coal, and other commodities remained at their Summer levels, China’s prospects for stability and growth would greatly diminish. However, if in June China could be projected to grow nearly 10% y/oy despite $100+/barrel oil, it makes sense that the country- which is rapidly developing its domestic market, can readily afford domestic investments such as those included in China’s $586 billion “stimulus” plan.

China needed this decline in commodity prices, and easing demand to allow its infrastructure to catch up to its growth. On November 14th, State Grid Corp. said “it will invest an extra 2.7 billion yuan ($400 million) to expand power grids,” (IHT), which is a welcome upgrade since over the Summer, China experienced troubling shortfalls in power distribution and production. And when the infrastructure is there to improve transportation efficiency, China’s economy will be humming again with double digit growth.

In 2006,Business Week laid out the case that “An economy growing in the 8 percent to 9 percent range would be ideal,” and China’s 2008 growth target was 8 percent, “following last year’s sizzling 11.9 percent expansion.” (China Daily, June 19, 2008). Growth at that range is more sustainable for China and can prevent the country from building out too much over-capacity. In fact, the world-wide economic downturn may ultimately benefit China. If the country’s weakest-managed companies consolidate, and if the over-capacity is not too enormous (Which it very well may be in the shipping industry.) there is a chance that Chinese companies will emerge from the downturn better managed and better equipped to compete on a global scale, like Haier and Galanz did before and emerged as national champions (also; Made In China, Donald Sull).

Larger Companies… But Many Are Larger “State”-Owned Companies. (Perhaps A Problem)

An alternative view points out that the downturn has led to larger, and perhaps stronger state owned corporations at the expense of privately held ones.

Some larger state mergers, both first announced in June but only recently completed, include:

(1) Sinotrans CSC Group, combining China’s largest logistics (state-owned) and largest river shipping company (state-owned) [so much for the anti-monopoly law.] Apparently, “The merger of the two state-owned groups is a move to consolidate fragmented state-owned groups into fewer, more efficient and focused entities which can deploy their resources for developing identified business areas.” After the merger, Sinotrans CSC will become “the country’s second largest shipping and logistics conglomerate, just trailing COSCO Group.”* (See Below)

(3) On October 27, “China Huaneng Group, one of the country’s largest power generating firms, bought a 40 percent stake in Huating Coal Group, the top coal mining company in the northwestern province of Gansu.” Laiwu Steel Corp. and Jinan Iron and Steel Co. agreed to merge to form China’s second largest iron and steel group in February (Reuters and China Daily)

(4) On November 6th Rizhao Iron and Steel, one of China’s largest private-sector steel mills, “signed an agreement to consolidate with a state-owned rival.” (Reuters). Rizhao’s yearly output is 8 million tons of steel (CER); comparatively, the state giant Baosteel, which is being strengthened by the Central Government and is aggressively merging and acquiring assets, produced “28 million tons” in 2007 and hopes to raise its capacity to 80m tons by 2012 (FT, Nov 6, 2008). In consideration of the Laiwu and Baosteel mergers, it will be difficult for private manufacturers to grow fast enough to compete.

Jobs? Production? Trade?

The Canton trade fair was sparsely attended; and some workers’ wages have been cut in half, which will at best constrain spending and prevent China’s domestic economy from picking up the slack in growth from its export sector. At worst, this could lead to stability challenges and tax revolts as workers are laid off, then return to the provinces after find it increasingly difficult to gain and hold jobs.

China’s tax rebates on export items, which were recently phased out, but which have now returned, may become a challenging issue in Europe and America, since the rebates will, along with alleged “currency manipulation,” undercut Western manufacturers’ prices. Coupled with cheaper oil and transportation costs, this will lead to a big discount and growth opportunity for Chinese exporters.

In response, Western countries may turn more protectionist, or else (barring a rise in energy or transportation costs from China), there will be another round of Western manufacturing demise.

Additional Information

* “Sinotrans posted operating revenue of RMB 57.7 billion in 2007, and aims to boost the figure to somewhere between RMB 80 billion and RMB 100 billion by 2010. Changjiang National Shipping focuses on river shipping. It has total assets of RMB 41.2 billion and a staff of 70,000, as of end 2007.” (SeaTrade Asia Online).

In the wake of the global economic downturn, China’s economy is growing slower; “only” 9 to 9.9% on the year (Reuters), and perhaps expanding at 8 to 9% in 2009 (China Daily, 11/8/08). Some experts warn that China needs to grow between 6 to 8% to ensure stability and sufficient employment for newly-emerging workers. These worries led to a spate of articles spouting warnings about China’s 2009 economic prospects. Announcement of China’s “financial stimulus” package led to a brief hope-driventurnaround in investor opinion, but China alone cannot lead worldwide economic recovery (other analysts agree). Still, China’s economic composition allows it to weather this recession quite well.

The mass media seems at times to get into “bandwagons” of “fad” commentary that lose sight of the big picture behind issues. For purposes of perspective, I present a cautionary review of some now-ironic predictions and “dire warnings” that were made from November 2007 until today.

(Later, I hope to present a case for what circumstances will allow for continued Chinese economic viability.)

There always seems to be another crisis looming, and yet, China sustains its economic growth. This summer, China was buffeted by increasing energy prices, which contributed to rising prices for food and other commodities. Now, China has seen six consecutive months of declines in its inflation rate and China fears deflation may arrive around February 2009 (The Guardian). China last dealt with deflation in 2002, shortly after China joined the WTO (in late 2001); interestingly, that deflationary experience was similarly precipitated by domestic overcapacity.

Remember back in March 2008 when “Premier Wen Jiabao said tackling inflation was ‘the biggest concern of the people'”, and the BBC commented that “[t]his is a serious concern for the government, which fears higher food prices could trigger social unrest.” (BBC, March 11, 2008).

Deflation may harm China’s growth, but it may also correct a near-overheated inflationary market that was otherwise in danger of bursting. In 2002 the Hong Kong General Chamber of Commerce warned of deflation, but also noted its benefits (I emphasized the most pertinent part); “[a]lthough deflation can give consumers greater spending power, it ultimately gives way to weaker demand as consumer confidence begins to erode [because prices keep falling]… On the flip side, deflation can help increase consumers’ spending power, raise the standard of living of China’s poorer residents, and weed out weaker companies…Mild deflation in China has so far kept the economy from going into recession, and the economy has enjoyed steady growth for the whole of 2002.”

Both inflation and deflation can harm economies, given other surrounding factors, but when making “bets” on China’s future, this current situation should serve as a reminder to draft out a long term plan. In February and March, headline articles appeared not to see this slowdown coming. Instead, they were concerned that inflation driven by rising commodity prices would lead to rising prices for exported Chinese goods, and dire domestic consequences.

Just four months ago, Albert Keidel’s piece on China’s coming economic rise was touted as a harbinger of a Chinese Century of overpowering strength. Although people who study China know China currently lacks the economic heft to single-handedly support the world economy, TV newscasters, the BBC, and others complained about how China’s demand was either the main or a significant factor for driving up oil prices. Although China’s rising demand certainly contributed to some of the climb to $150/barrel oil, no one country’s sole future expected supply and demand caused oil’s massive price fluctuations from $60 to $150.

Importantly, China’s decreases in demand for certain commodities came after American consumers cut back on their mileage driven and energy utilized (June 2008 saw the biggest decline in US oil utilization in 17 years). In China, however, imported oil demand was up 17.3 percent in the first five months of 2008 [and was up 3 percent in June] despite prices rising 66.9 percent over the previous year (Xinhua, June 2008). China’s imported oil demand decreased 7 percent in July, but then gained 11.5 percent in August, according to Bloomberg.

Additionally, bulls who bet that oil would become scarce and that demand would remain high were confronted with Western public policy pushes toward financing and supporting recovery of additional energy sources.

When considering China’s current affect on the world, it is important to remember that although China is growing, “China accounts for no more than 11% of global GDP, against 21% for the U.S, on a purchasing power parity basis. [5% for China and 28% on non-PPP numbers] Its domestic market is only one-eighth of the size of the U.S.’s at $1.2 trillion (2007 consumption). (Forbes). China can be a guiding factor, one of many in the growth of the world economy, so its domestic policies will likely neither harm, nor hurt the global economy much more than Japanese domestic economic policies (which admittedly is no small effect). But China alone cannot shake the world… yet.

Bonus

* A paper delivered at the Peterson Institute on April 3, 2008 argues that to combat inflation “the world economy really needs what is now forecast for 2008/2009: a significant slowing of economic growth.” It’s good to remember that some people thought this recession could help the economy avoid a larger future financial disaster. Could America’s economic implosion actually have saved China from its own domestic inflationary and energy-price-driven meltdown? It is an interesting point to consider.

To avoid over-capacity, economies need to grow at measured rates. 20 years of growth at 6% is arguably better than 5 years at 10%, 2 years at 5%, then 4 years at 9%, then 3 years at 4% since steady growth rates guarantee a modicum of both stability and job security.

* To allow another view to express itself; perhaps China caused part of the fluctuation in demand for some commodities. J. Christoph Amberger at Seeking Alpha warned in April 2008 that slowing growth in textile and light industry export toward Western countries would contribute to Chinese economic weakness post-Olympics.

If you were inspired by China Comment’s article, “Pipelines to Partnerships,” I am interested in hearing your opinions of the feasibility of future international Chinese oil and natural gas pipelines. To help facilitate the discussion and feedback, I have a little poll here:

China will build a further 150,000 km (93,000 miles) of oil and gas pipelines in the next 12 years, the official Xinhua news agency said on October 19th” (Reuters). These pipelines traveling within the country, and others which travel without carry oil, and geopolitical implications.

Below, I examine where China’s internationally-destined pipelines are going, examine the feasibility, and postulate what the pipeline developments mean for China’s future development.

Chinese Pipelines, Comparatively

China has a relatively developed system of oil and natural gas pipelines, but there is a great deal of room for improved coverage and efficiency. According to the CIA World Factbook, in 2007 China had 26,344 km of gas, and 17,240 km of oil pipelines. Comparatively, Russia in 2007 had 158,699 km of gas, and 72,347 km of oil, and the United States in 2006 had 244,620 km that carried petroleum products, and 548,665 km carrying natural gas. The United Kingdom, a much smaller country than China, had 18,980 km of gas and 4,930 km of oil pipelines.

If China’s goals are reached, in 12 years, the total length of its pipelines will reach around 193,000 km, still much less than the lines in the United States or Russia.

A great deal of China’s planned internal pipeline length will be achieved due to the construction of a West-East pipeline, pumping natural gas from Xinjiang to Guangzhou. The project will cost around $20 billion, and cover over 9,102 km.

There are great opportunities for natural gas expertise and development in China. According to Xinhua, “the country planned to raise the ratio of natural gas in its energy consumption by 2.5 percentage points to 5.3 percent by 2010.”

Overview of Expanding Chinese International Energy Pipelines (This is by no means an exhaustive list; but it is extensive.)

Length: 962.2 km (600 mile) from Atasu in Kazakhstan to the Alataw Pass of Xinjiang. (Planned additional 700 km expansion to link to the Caspian Sea.)Cost: $700-800 million shared between China and Kazakhstan.Capacity: 5-20 million tons of oil a year.What It Carries: “In 2005, China imported 1.3 million tons of crude oil from Kazakhstan via Alataw Pass.” (People’s Daily). By 2007, that number rose to 6 million tons (Upstream Online).Future Developments: In August 2007, China and Kazakhstan agreed to extend the pipeline by 700 km (435 miles) westward to link it to the Caspian Sea.
(From: People’s Daily, May 25, 2006, China Daily, July 21, 2006, and Reuters, August 18, 2007.)

Length: 10,000 km. It originates in Turkmenistan, runs through Uzbekistan, southern Kazakhstan, and then enters China (People’s Daily, September 20, 2008). Stage I of the Uzbek part will be finished by Jan. 2010. Stage II finished by Jan. 2012 (RIA Novostoi, April 2008.) The Kazakhstan section began construction in July 2008, and phase I should completed by June 2010. “The first segment of the [Kazakh section of the] pipeline will go from the Uzbek-Kazakh border to the Kazakh-China border through Shymkent, the administrative center of the South Kazakhstan region and reach China’s Horgos” (From: New Europe, July 21, 2008).

Cost: $7.31 billion. (New Europe, January 5, 2008).Capacity: Upon its completion and full utilization in 2013, the pipeline will have an annual transmission capacity of 30-40 billion cubic meters of natural gas (People’s Daily, September 20, 2008). These supplies should last for 30 years. Initially, 4.5 billion cubic meters will be pumped annually. Completion of Kazakhstan’s “second segment (Beineu – Bozoi – Kzyl-Orda – Shymkent) will have an annual capacity of 10 billion cubic metres and a length of 1,480 kilometres” (New Europe, July 21, 2008).

Of Note: Turkmenistan sells nearly half of its natural gas to Russia, around 40 billion cubic meters a year of the 70 billion cubic meters of gas a year it produces. By constructing this pipeline toward China, Turkmenistan gains access to a source that is willing to pay more for its gas, and loosens Russia’s hold on its economy, while bringing Turkmenistan closer toward China’s sphere of influence.Also see: Silk Road Intelligencer, July 9, 2008 and Asia Times Online, July 17, 2008 and China’s Pipeline Diplomacy.

——–

Russia-China Gas Pipeline (Altai Gas Pipeline Project)(2011 previous plan; 2013 is now a more likely date due to diplomatic and economic hangups between China and Russia over the price of natural gas from the pipeline and its route. If however, a 2015 goal of piping gas to South Korea is achieved, an earlier constructed Chinese spur would seem rational. (Also see the WSJ))

This on-again, off again pipeline finally seemed ready to be deployed when resource and energy prices reached stratospheric levels during Spring 2008. However energy price drops, expansion of China’s energy supplies vis-a-vis domestic and Turkmenistani projects, and a worldwide economic slowdown have resulted in Russia rethinking the deal. According to an Oct. 8, 2008 Forbes article, “Russia will delay the construction of proposed gas pipeline to China due to competition from other gas sources in the Chinese market,” such as the new Central Asia Gas Pipeline.

Note (Update 10/29/2008) Despite delays in the natural gas pipeline; the ESPO oil pipeline spur, which will cost around $800 million and deliver 300,000 b/d should be completed sometime in mid-late 2009; although as often seems to happen with Russia-related projects, disputes and delay have arisen as of mid Nov/2008. When oil prices start rising again though, the parties will likely give/take more in negotiations. That would place pipeline completion around mid-late 2010.)

——–

Pakistan-China Gas Pipeline

This pipeline would provide China with an alternative transportation route to the easily blockaded Strait of Malacca. However, a solely Pakistani-Chinese pipeline is more of a distant future hope than any short-term reality. Given Pakistan’s unrest and general difficulties, it will be difficult to safely tap the country’s resources or make any extensive long term investments.Information on the pipeline’s proposal is from: (Xinhua, April 30, 2007).

This pipeline is significantly more likely to be built than a solely Pakistan-China pipeline since Iran has better developed energy infrastructure than Pakistan and can supply the needed resources. However, there is danger that the pipeline in Pakistan may suffer damage due to terrorism or internal unrest much as pipelines in Iraq have been plagued by terrorism. Originally, the pipeline was planned to go to India, but has been held up for various reasons.

——Myanmar-Yunnan Gas Pipeline (Kyaukphyu-Kunming)(Under negotiation and feasibility study. Plausibility of near-term development… low due to stability concerns, especially post-cyclone. Plausibility of development 2010-2012 medium to high depending on international natural gas prices and stability of the region.)

Length: 360 km.Cost: $1+ billion.Capacity: 1.5m bpd/oil.Notes: “In early 2007 the China Petroleum Engineering and Construction Corporation (CPECC) signed an agreement with Abu Dhabi’s International Petroleum Investment Company to build a pipeline that would bypass the Strait of Hormuz… Still, when completed, it will be a drop in a bucket compared to the 17 million bpd of crude oil that pass the Hormuz Strait today.” This pipeline is important because it helps alleviate threats that Chinese oil will be blockaded should the international diplomatic situation degrade.(Pipeline Information from Here. and Yitzhak Shichor writing for Jamestown in September, 2008.)

Compact Analysis

Importation of foreign Natural Gas is not essential to the growth of China’s energy industry since it accounts for less than 5% of China’s energy mix, but the addition of pipelines carrying up to 40 billion cubic meters of natural gas apiece would nearly double current Chinese capacity.

In 2006, China received 69.6% of its energy from Coal, 21.1% from Oil (350M tons; 183.7M produced domestically, around 47% imported), 5.8% from Hydroelectric, 2.7% (~3% in 2007) Natural Gas (55.6B cubic meters- in 2007 this rose to 69.8B cubic meters), 0.8% (1.3 % in 2007) from Nuclear Energy (9.6 GW), and 0.4% (0.7% in 2007) from Wind (5.6 GW), and [data from: Rosen (17), and China Daily (2006) with some updating.]

China‘s natural gas output in 2005 was around 48 billion cubic meters, in 2006 it was 58.6 billion cubic meters (China Daily, October 2007), and it was 69.8B cubic meters in 2007. “The government plans to increase the figure to 80 bcm by 2010 and 120 bcm by 2020… the expected demand [is] 120 bcm per year by 2010 and [150-]200 bcm by 2020.” (China Daily, Dec 2005)

Beijing will receive a relatively large chunk of Turkmenistan, Kazakhstan and Uzbekistan’s natural gas and oil, which will strengthen Beijing’s influence in the SCO (Shanghai Cooperative Organization) economic and defense grouping of Central Asian states. Beijing’s rising importance in these countries’ GDPs will lead to declines in Russian and American power, and present multiple diplomatic options for these countries.

Through its energy diplomacy and economic influence, Beijing appears to be creating a multi-polar near-term future for the Central Asia-East Asia world. A few years after the pipelines are completed at at capacity and the gas and money are flowing along the routes (perhaps as early as 2012), Beijing will become integral to these relatively small economies which may become increasingly less amenable to hosting Russian or American military bases or exercises without extremely viable compensation.

Beijing already surpasses the US in trade partner significance to several Central Asian States, trading $12 billion in 2006 (CRS, 71) with the region, compared to 2006 US trade of slightly over $2.3 billion with the region. (Data from HERE, HERE, HERE, HERE, and HERE for exports; HERE for imports)

The Central Asian states need Beijing more than Beijing needs them so it will be interesting to see what diplomatic initiatives China may enact and what diplomatic repercussions these energy shifts will have if Beijing attempts to exercise its soft power, especially as energy resources are diverted from Russia, economies become tied to China rather than Russia or US-Allies, and Iran finds a new source for its gas pipelines.

The Dallas Morning News, the AP, and other news outlets often warn China’s aging will put significant breaks on its future economic development. I disagree.

Although China has some challenges to address regarding its aging population, aging alone will not be a significant drag on China’s GDP growth rate. Here, I examine some common fears about China’s aging populace, then I rebut the dire predictions.

Elder Population Explosion

Warnings about China’s aging population often start with the China National Committee on Aging’s claim that “[b]y 2020, China will have 400 million people age 60 and older, and 100 million older than 80. By 2050, a third of the 1.4 billion Chinese will be at least 60.”

This is a lot of elderly, and some commentators believe China may grow old before it grows rich. But a population of 400 million elderly still leaves nearly 900 million younger folk ready to work and contribute to increased productivity.

When the support ratio of young to the elderly dwindles from 5-1 to 3-1 or 2-1 that could feasibly cripple sustained economic growth in most economies.However, China is not a typical developed country that has fully exploited the human capital of its workers– China’s workforce is still developing.

Productivity and Economic Potential

Beijing is pushing energy efficiency, development of rural regions, and policies that will help move millions of Chinese out of the rural sector and into the urban. Amazingly, some “98 million to 128 million Chinese agricultural workers are surplus.” In “A Weak China?” I discussed how 30-45% of China’s population is still rural, whereas South Korea and the United States have less than 7%!

Economic growth comes when productivity, education, infrastructure, and efficiency are present. Even though China has been underdeveloped in all those sectors, it has posted remarkable 10%+ GDP growth for years. Ultimately, China still has a long way to grow.

Caring for the Elderly

China’s economic growth could slow if society is required to care for the elderly through imposition of social programs. However, unlike in the West, Beijing simply has not made the same massive social welfare program commitments. Although Beijing recently made some commitments, the Party’s pocketbook does not grant the same level of government-sponsored elder-care expected by Westerners. Instead, “66 percent of interviewed rural residents said they would rely on their children when they were old” (People’s Daily).

Because Chinese people know they must depend on themselves and not the government for elder care, they have traditionally saved a great deal of cash that could otherwise have been used to promote even faster Chinese GDP growth.

The Dallas Morning News, citing Cai Fang, “director of the Institute of Population and Labor Economics with the Chinese Academy of Social Sciences,” attempts to indicate that 1/4th of China’s economic growth came “from the productivity of a workforce with few dependents younger than 15 or older than 65… [and that] In “five years, that advantage will start disappearing, and a rising number of the elderly will slow down China’s economic growth,” according to Dr. Cai.

Although there may have been “few dependents” during China’s growth period, China’s savings rate has been one of the world’s highest, “totaling nearly 40% of the gross domestic product” as of 2004 (as noted by theMcKinsey Quarterly). This could be because the Chinese traditionally plan ahead to their own elderly futures, expecting to use their own money instead of government subsidies.

The Chinese already have a good deal of cash saved, therefore it is odd to assume that those expecting to become elderly will divert significant additional money from the economy to retirement savings accounts. Individual Chinese are, in general, already prepared for financial disaster.

Demands of elder-care seem unlikely to directly affect Chinese consumer spending any more than their current 40% savings rate already has allegedly “depressed” consumer spending.

Health

Alarmist stories about China’s aging problems often cite how China’s elderly are compelled to work longer to ensure they will have enough money available for when they retire. This, however, seems to be an argument for continued Chinese growth rather than economic contraction. Assuming the elderly remain relatively healthy, they will have a longer time to contribute to China’s GDP.

Admittedly, Chinese aging will create some problems. Those problems are, however, addressable.

* Rural Rust Belts. In Japan, which currently has nearly 21% of its population aged 65+, rural cities have been hollowed out. Aging will press hard against rural areas which may need to attract polluting industries in order to gain money that can be used to subsidize elderly populations. The young have moved to the coasts where economic opportunities exist. However, the young may return. The future of China appears to be in development of its internal market. It seems likely that for various reasons, the center of the country will experience significant investment growth from 2011-onwards. (A future article will examine this theory.)

* Older people will be alone, without anyone to support them, or to give comfort. This could lead to psychological problems, crime problems of people preying on the elderly, public health hazard problems, and stability problems (the banned F-G belief system was remarkably popular among the elderly.)

* Health concerns. It can be quite costly to pay for elder care and if the Chinese society ages poorly and develops chronic conditions that are expensive to treat, even the massive amounts they saved may not be enough to ensure fiscal security.

* Rising expectations for public health care could tie down government investment in productivity-creating enterprises. Although on average “retired Chinese [currently] get government help of little more than $50 a month,” there are demands for more government assistance.

According to the Dallas Morning News article, “[some] polls [they do not cite which polls or who conducted them] show 87 percent of Chinese now expect the government to take care of retirement income and health care… A startling share of Chinese now believe the primary responsibility for caring for the elderly should be with society as a whole – the state… And if the state fails to deliver on that expectation, it could be a real social and political crisis.”

Conclusion

China is aging and with age will come new challenges. However, China is well-situated to confront its challenges. Although the net size of China’s workforce will decline, the net productive urban manufacturing core will remain steady as over 120 million rural agricultural workers transition to other industries. China can improve its infrastructure, logistics supply chains and, energy efficiency. Even improvement to US-levels will result in millions worth of savings that will directly transition toward GDP growth.

* On Energy Efficiency: “In 2005, China’s energy consumption per unit of GDP was… more than three times the level of the United States, more than five times that of Germany and eight times that of Japan” (Xinhua); specifically, “the energy intensity of China in 2005… was 35,766 British thermal units per U.S. dollar. In the U.S., the Btu/dollar ratio was 9,113. In the U.K. and Japan, the figures were even lower, 6,145 and 4,519 respectively” (Forbes).

* In General: I realize there are almost limitless factors to consider regarding the future of China’s aging, so if you would like to discuss China’s aging, feel free to communicate in the Comments section.

Hugo Chavez and Hu Jintao met on September 24, 2008 and signed 12 cooperative deals dealing with “trade, oil, finance, education, justice, telecommunications, infrastructure, sports and cultural relics” (Xinhua). The economic and oil agreements appear to be the most politically important since Venezuela is aggressively attempting to diversity its options in dispersing its abundant supplies of heavy crude oil.

Below, I explore possible effects of Chavez’s goal to ship 1,000,000 barrels of oil a day to China by 2012.

Amount of Trade / Growing Cooperation.

In 2001, China and Venezuela established a joint trade “committee [that] aims at consolidating and strengthening trade cooperation. “ (Xinhua), which helped China become one of Venezula’s five largest trading partners. The US, Brazil, and Colombia are among the others. China’s money, however, mostly travels toward the EU, the US, Japan, and the ASEAN nations (People’s Daily).

Year on year, China’s trade with Venezuela is steadily increasing. “Bilateral trade in the first seven months reached $6.23 billion, compared with $5.9 billion for all of 2007, Foreign Ministry spokeswoman Jiang Yu said” (Bodzin and Wang, Bloomberg).

Below is a chart examining the rise in trade between China and Venezuela.

In the September 25th agreements, “Hu said China would like to deepen “all-phase and integrated” oil cooperation with Venezuela, encourage businesses to invest in Venezuela and establish a trade zone. China will also participate in building Venezuela’s infrastructures, including railway system, telecommunications network, social housing and hydro-power” (Xinhua). Additionally, China and Venezuela plan to construct two refineries, one in each country (Oil and Gas Journal).

Venezuela hopes to make 1,000,000 barrels/day in oil deliveries to China by 2012. The Venezuelans have been working diligently toward that goal; “In the first 7 months of 2008, Venezuela exported 5.18 million tons, or 38 million bbl, of crude to China—an increase of 93.8% over 2007.” (Oil and Gas Journal).

To facilitate cooperation and investment, China and Venezuela set up the “Joint Financing Fund, also known as the “heavy fund”” in early 2008 with capital of $6 billion (China Daily) [$4 billion of which was provided by China]. On September 25th, the countries agreed to double the investment to $12 billion (Shanghai Daily).

A market research report by Business Monitor International expects Venezuela will increase its 2008 production from 2.75 million b/day in 2008 to oil and gas liquids production of 2.93 million b/d by 2012. Internally, “[c]onsumption is forecast to increase by around 3% per annum to 2012, implying [domestic] demand of 675,000 b/d by this point. The export capability would thus be about 2.26mn b/d by 2012″ (*A).

Crude Predictions / Feasibility

Logistics of shipping the distance from South America to China will be important to overcome. To in-part facilitate this obstacle, “the two have a shipping joint venture that will build the shared very large crude carrier” (Guardian). Still, according to the Heritage Foundation, the largest supertankers cannot pass through the Panama Canal, which increases costs of oil transport from Venezuela to China. Expansion of the Panama Canal should be completed by 2014. Expansion will expand the current locks from “33 metres (108 feet) wide” “The new locks would be 50 metres (150 feet). A third lane of traffic would be able to handle the wider loads” (BBC; also “Brazil’s Passage To China“).

It is important to retain a sense of perspective about Venezuela’s importance to China. China wants Venezuela’s oil, but Venezuela currently supplies only 4 percent of China’s total oil imports, according to a quotation by a Chinese government official on Bloomberg, but from data elsewhere it appears the number is closer to 10 percent. [Forbes clarifies that Bloomberg misunderstood the quotation- China receives 4% of Venezuela’s crude exports.] China imports about 46% of its oil needs (Xinhua).

In 2006, China’s oil imports mainly came from; Angola (~500,000 b/day), Saudi Arabia (~470,000 b/day), Iran (~350,000 b/day), Russia (~350,000 b/day), and Oman (~220,000 b/day). At that time, Venezuela’s supplies of oil did not even rank among China’s top five suppliers. (Data from the EIA).

Still, China’s oil import demands are rising and were up 14.7% in 2007. Every year, Venezuela supplies greater and greater amounts of oil to China, from a mere 50,000 b/day in 2005 to over 300,000 b/day in 2008.

Consequences. Can Hugo Shift to China?

Hugo Chavez needs other places to sell his oil if he plans to act on his anti-American rhetoric (PINR). Currently, though, the US is very important to Venezuela’s economy. “The U.S. buys about two-thirds of Venezuela’s daily exports of 2 million barrels,” which works out to about 1.3 million-1.5 million b/day (Bodzin and Wang, Bloomberg). As of 2005, over 60% of Venezuela’s oil exports went to the United States and was the United States’ fourth-largest oil supplier (Bajpaee, Jamestown). Interestingly, however, “U.S. imports of Venezuelan oil fell by 11.7 percent to a five-year low in the first four months of the year” (IHT).

The US is Venezuela’s largest trading partner, and Venezuela is the US’s 9th largest trading partner in terms of imports in 2006 and 2007. Venezuela accounted for over 37,000 million in trade in 2006 and 39,000 million in trade in 2007. In 2008, partially due to oil’s price spike, trade was up 58.5% to 32,000 million by July 2008, according to the Industry Trade Association of the US Dept. of Commerce.

China’s purchases of 364,000 b/day from Venezuela is about 1/4th of US purchases. Currently the United States is more attractive for Venezuela to ship to because the US has refineries which can deal with heavy Venezuelan crude, and the United States is much closer and cost-effective for Venezuela to ship toward.

Chavez interestingly claims that “Venezuela won’t suspend crude exports to the U.S. on increased supplies to China” (Bloomberg). If both the Chinese and the Venezuelans make significant investments in developing Venezuela’s oil fields, this will be possible. In fact, “PDVSA hopes that Chinese oil companies [alone] will produce at least 400,000 barrels of crude a day in Venezuela by 2011.”

However, President Chavez’s highly socialist economic policies might cripple indigenous Venezuela PDVSA investment into oil field development and refining. Although Venezuela may intend a “win-win” situation, the reality might turn into a zero-sum game where Venezuela gradually decouples crude shipments away from the United States’ heavy oil refineries (which refine nearly a third of Venezuelan heavy crude), and directs them toward domestic and Chinese refineries.

It is important to note that with expected growth of only 200,000 additional barrels/day expected by 2012, Venezuela may redirect oil and further decouple its economy from the United States in order to meet its self-imposed ship-to-China obligations.

Last Words

As a result of its closer economic relationship with China, Venezuela appears to be purchasing political “cover.” The less its economy is dependent on America’s, Venezuela can more deeply pursue Chavez’s Bolivarian Revolution. It seems this deal mainly benefits Venezuela in its short term goals of independence from American economics.

(*A) Also of note; “Between 2007 and 2018, we are forecasting an increase in Venezuelan oil production of 23.2%, with liquids volumes rising steadily from 2.72mn b/d to 3.35mn b/d.” Business Monitor International Report.

Nuances and questions abound in discussion of China’s economy and where it is headed. Is it due for a fall? Will exports decline? What about currency reevaluation? What about inflation?

Here, I collect and comment on some recent numbers and articles dealing with China’s economic situation:

Useful Numbers

Budget Surplus
“China’s budget surplus for 2008, to July 31, was more than $200 billion, up by 33 per cent year on year in the first half” (Callick, The Australian).

Consumer Spending / Domestic Consumption
“Retail sales, the main measure of Chinese consumer spending, grew by 23.2% year on year in August, slightly less than July’s 23.3% but substantially better than last August’s 17.1%” (Pettis).

Retail sales rose to $128.1 billion in August (Oliver). Interestingly, the Olympics did not appear to provide much of a “bump” in August retail sales.

This leads me to conclude that although industrial construction might rise post-Olympics, consumer spending will likely actually decrease for September as “belts tighten” and reasons for splurging diminish. Although more employees will be “back on the job,” they will not necessarily have extra discretionary income to spend. By October or November, the “Olympic bump” of disruption should cease affecting China’s consumer spending numbers, and it is wholly possible that they will trend downward.

Economic Growth
In its Asian Development Outlook 2008 Update, the Asian Development Bank “anticipated China’s gross domestic product (GDP) would grow 10 percent this year, consistent with its April forecast. However, it lowered China’s 2009 predicted growth rate from 9.8 to 9.5 percent… In the first half of this year, the nation’s GDP expanded 10.4 percent, 1.8 percentage points slower than the same period last year” (China Daily).

“Official loan growth, if adjusted to strip out the effects of inflation, expanded a modest 4% in August, according to Standard Chartered estimates” (Oliver).

“Effective Tuesday [September 16], the People’s Bank of China lowered by 0.27 percent, to 7.2 percent, the regulated benchmark rate that commercial banks may charge for one-year loans to business borrowers with strong credit histories… The central bank also lowered by a full percentage point the share of assets that small and medium-size banks must deposit as reserves with the central bank, effective Sept. 25. The so-called reserve requirement ratio is an important tool in China for limiting how much money can be lent by commercial banks” (New York Times).

Export Growth
“Export growth also slowed, to 21.1% year on year in August from 26.9% in July. That left the trade surplus for August at a record $28.7 billion – a number which will help ensure that China’s money supply will continue expanding sharply in August” (Pettis).

“If the “Chinese content” of China’s goods export sector is around 50% (Vox), goods exports account for between 17 and 18% of China’s GDP. Exports of goods and services account for about 12% of US GDP” (Setser.)

Setser’s numbers imply China is susceptible to a global downturn and decline in its export sector. To offset a decline in national growth, domestic spending will need to rise significantly if export demand suddenly drops off. Between rising oil prices, costs of doing business in China, and a developing worldwide economic malaise, it appears China will see some significant declines in export growth from September through October.

FDI Into China
“Foreign direct investment into China rose 41.6 percent in the first eight months of the year compared with the same period last year, Beijing said.

“Overseas companies invested 67.7 billion dollars in the period from January to August, the commerce ministry said in a brief statement on its website” (AFP).

Import Growth
“Imports grew last month at a 23.1% in August, down sharply from 33.7% in July” (Pettis).

Post-Olympics, Import growth is likely to resume as demand for internationally-acquired resources used in construction will increase.

Industrial Growth
“Industrial output grew by 12.8% year on year in August, versus 14.7% in July, and 17.5% last August. There was weakness in almost every sector, with iron and automobile production actually contracting versus one year ago” (Pettis).

“China’s industrial production expanded at its weakest pace in six years in August, reflecting factory shutdowns for the Olympics and cooling overseas demand for consumer goods … Merrill Lynch estimates the factory shutdowns, combined weaker demand for steel, cement other materials resulting from the construction freeze, knocked 2.5 percentage points off headline growth. [They] expect a post-Olympic rebound in industrial production growth [based] on both pent-up demand and the post-quake reconstruction.” (Oliver, MarketWatch).

Inflation
“CPI inflation for August, was surprisingly good, coming in at 4.9% year on year, which is well below July’s 6.3% and also well below market expectations of around 5.5%. The decline in CPI inflation was driven mostly by declining prices in pork and vegetable oil… All the decline in CPI occurred in the food sector – non food inflation was steady at 2.1%.” (Pettis).

“The [Asian Development Bank] bank also lifts its inflation projection for next year to 5.5 percent from [an April estimate of] 5 percent… citing possible price hikes of fuel and electricity, which may lead to higher production costs being passed onto consumers” (China Daily).

Monetary Policy
“Commenting on the moves, Zhuang Jian, senior economist at the ADB, said the rate cuts indicate the government’s tightening monetary policy is beginning to relax. He also expected more loosening policies to come either later this year or in 2009 in order to ensure the sustainable growth of the economy” (China Daily).

RMB Reevaluation and China’s Foreign Investments
“From June 2007 to June 2008, the foreign assets of China’s central bank increased by $681b” (Setser).

“If China’s total foreign holdings rise to $3 trillion by the end of 2009—an increase that is consistent with China’s current pace of foreign asset accumulation—a 33 percent RMB appreciation against the dollar and euro would produce a $1 trillion financial loss” (Setser, 30).

Value-Added To Exports & Results for Currency Reevaluation
According to a new way of evaluating value-added to products; “the share of foreign value added in Chinese manufactured exports is at about 50%… which is much lower than most other countries. This implies that a given exchange rate appreciation is likely to have a smaller effect on China’s trade surplus than for other countries. The domestic content share is particularly low in sectors that are likely to be labelled as sophisticated, such as electronic devices and telecommunication equipments. This means the competitive pressure China’s exports place on skilled workers in high-income countries is smaller than suggested by a simple-minded look at the raw trade data.” (Vox) (These assertions are well worth a detailed examination at a later time.)

With the US Shuttle’s planned retirement, and the Orion’s delayed development, the United States’ space presence could theoretically in the future be threatened in prestige by the Chinese. Below, I examine the Chinese space program, and possible implications for America’s space program.

* The Moon China has vague plans for putting a person on the moon by 2020, but plans are not yet official. The Economist cites Jiao Weixin of Peking University who “says China would not have the technical ability to put a man on the moon for another 20 years.” If China develops the capacity, that would put China’s moon arrival date around 2027. It appears somewhat odd to state it could take China so long to put someone on the moon, considering how they have rapidly accelerated their space program in the past five years.

Comparatively, NASA was founded in the US in 1958, conducted ASAT tests by 1959, had astronauts in space by 1962, landed “men on the moon” in 1969, and launched Skylab in 1973.

Today, China has access to superior technology than what the US possessed in the 1960s. If funding and bureaucratic will exists, I do not think it would be foolish to suggest the Chinese could feasibly reach their spaceflight goals ahead of schedule.

Assuming China’s progress tracks America’s historical progress (and it will by no means necessarily track similar milestones, for various reasons), China would be able to reach the moon eight years after China first launched manned spaceflight. That is, they could arrive by 2011-2012. No sources indicate the Chinese are attempting to achieve those dates. Still, a moon landing would be a dramatic accomplishment to highlight President Hu’s passing the baton of leadership at the 2012 Party Congress.

* Lunar Exploration

In 2007, as an intermediate step toward eventual human exploration of the moon, China sent a lunar probe. In 2009, China will send its second lunar probe, the Chang’e II. In 2012, China intends to land a moon rover vehicle. In 2017, China hopes to send a second moon rover that will land, collect soil samples, and then return to Earth (Xinhua).

Chinese Space Flight Timeline

October 2003, with the Shenzhou V’s successful journey, China became the third country to send a person into space with its own equipment.

October 2005, China sent two people into space for a five-day period on the Shenzhou VI.

January 2007, China conducted an Anti-Satellite ASAT test, becoming the third country to have successfully performed such a test (PINR).

Late September 2008, China will send three people into space on the Shenzhou VII. They will perform China’s first spacewalk (IHT).

How Much are the Chinese Spending?

Estimates of Chinese space expenditures vary, but the World Security Institute posted an overview of amounts. Official statements indicate the Chinese spent about $120 million on the Shenzhou V program, and claimed space program spending of $240 million a year; but those sums are almost certainly significantly underreported. More recently Chinese-government reported estimates appear to be closer to reality. China Daily, for example,claims $630 million will be invested in a new project to design a carrier rocket, the Long March V. Western reports suggest China’s annual space expenditures as between $1.2 to $3 billion, which would make Chinese space program spending comparable to Japan (~$2.1 billion) and Russia’s yearly expenditures (~$1.4 billion).

In 2005, the United States spent over $16 billion on government-sponsored space exploration, with $6 billion going toward space flight, $4 billion to the shuttle, and $500 million for flight support. (In 2007, NASA spent $16.8 billion, and in 2006 the European Space Administration spent over $4 billion.) NASA estimates the cost for “landing a crew on the Moon in 2020: [will be] $64 billion in FY2003 dollars. The $64 billion consists of $24 billion to build and operate the Crew Exploration Vehicle from FY2004-2020; plus $40 billion for the years 2011-2020 to build the lunar lander portion of that vehicle, a new launch vehicle, and operations. The $64 billion does not include the cost of robotic missions” (NASA, 4).

China is spending a good amount on space exploration, but it appears to be embarking on small practical steps rather than grandiose displays in development. China intends to perfect technology designed to traverse the lunar surface before it makes concrete plans to send human beings to the moon.

China probably could, through concerted funding and engineering, send a shuttle with humans to the moon by 2014-2017, since by then it should have a moon rover that can land and then return to Earth. However, plans appear directed toward developing technology to permit human landing on the moon for extended periods. Without development of a practical exploration vehicle, exploration of the moon might be too limited to justify significant expenditures.

For now, most of China’s space spending appears focused on satellites and spacecraft. China’s narrow focus might allow it to develop new programs much quicker. Still, without significant further investment, it is unlikely the Chinese will travel to the moon until after 2014 when resources can be refocused on exploration vehicles.

Consequences

* Chinese success in space flight, coming at a time when America is drawing back space exploration programs and entering into an antagonistic cycle vis-a-vis Russia might lead to postulations that America might buy astronaut flight time from the Chinese in order to fulfill American obligations toward the International Space Station. However, this probably will not happen.

Although the following is speculation of a space-wise layman, it appears that China’s space program will develop too slowly to present a complement or competitor to NASA in the crucial period, 2010 to 2014, when NASA might benefit from a strong Chinese space-partner.

* NASA’s current Shuttle will be retired by 2010 if current policies are continued. US cargo to the International Space Station (ISS) is expected to be transported by private companies after that date. These companies include Orbital Science and SpaceX (run by the founder of PayPa1). NASA also plans to close the gap of ISS supply by “buy[ing] roughly $700 million worth of [cargo] services from Russia through 2011″ (MSNBC).

American astronauts could be transported to the ISS by the Russians. But, considering recent tensions, continued cooperation with a Russian space program might be unlikely. And after 2011 when an agreement to purchase cargo from the Russians expires, NASA will likely be pressured to reach a politically safe solution to solve its cargo and astronaut supply problem.

Assuming that cargo ships are ready by delivery-date, which is by no means necessarily going to be achieved, cargo ships will be available in late 2010, early 2011. However, if the Shuttle is retired on schedule, astronauts will be unable to reach the ISS with American ships. As a stop-gap measure, astronauts might be transported on SpaceX’s cargo ships, which are being designed to be “man-rated,” but which are as yet unproven.

* Although some hoped to have NASA’s new Orion class shuttles ready for service by late 2013; the project deadline is more likely to creep toward March 2015. That makes it even more imperative for NASA to close the shuttleless gap between 2010 and 2015.

* NASA is studying feasibility of extending the current shuttles’ lives until 2015. Extension of useful lives presents problems both practical as to the shuttle maintenance, and economic since NASA hopes to divert flight money to development of its Orion-class shuttles.

* Assuming private options fail to produce, NASA might be tempted to look to China to help it fly astronauts to the ISS. However, there are problems with this scenario. China is not a partner involved with the ISS. Indeed, that appears to be a reason for Chinese plans to create a uniquely Chinese satellite. And politically, the deal could be touchy. A China-partnership might be marginally more politically acceptable than a Russia-partnership, but still, China is occasionally lambasted by Congress over human rights issues, most recently for its treatment of the T1b33tan unrest. Thus, such a partnership with China would be wrought with uncertainty. More important, China currently lacks capacity to rent or sell passage on its ships. China has its spaceflight resources quite busy putting even one space flight up each year.

Chinese Future in Space

China’s current space funding is not significant enough to pull off a near-future manned trip to the moon, or launch of a space station any time soon. Still, if funds are discovered in China’s budget for exploration and development, China could probably beat the United States back to the moon. However, China seems dedicated to a slow but steady vision of gradually increasing funds and development of space exploration. After 2015, the US will have its new Orion craft, and the Chinese will be send a land and return rover to the moon. In 2019, the US will return to the moon. In 2021 or 2022, a Chinese taikonaut might follow soon thereafter.

China’s Space Activities in 2006 (China government white paper) contains plans for the next 5-15 years and indepth discussion of China’s space achievements in fields such as satellites, and multilateral space-exploration agreements.

ASEAN
* Agreement on goods signed on 29 November 2004 for implementation in Jan 2005;
* Agreement on services signed in 14 January 2007 for implementation in July 2007;* Agreement on investment under negotiation (McKibbin and Jiang believe this may be concluded by 2010. 10.) However, a more recent article (August 27, 2008) postulates the agreement may be signed as early as December 2008.
* Phase-Out period for normal items ends for China and original ASEAN countries by 2010.
* Phase-Out period for sensitive items ends for China and original ASEAN countries by 2013.
* Phase-Out period for normal items ends for the newer ASEAN members (Cambodia, Laos, Myanmar, Vietnam.) by 2015.
* Phase-Out period for sensitive items ends for the newer ASEAN members (CLMV) by 2020.
* “According to ASEAN statistics, the trade value between the ASEAN and China increased from 59.6 billion U.S. dollars in 2003 to 171.1 billion U.S. dollars in 2007, growing at an annual rate of 30 percent” (Source).

AustraliaUnder Negotiation
* The tenth round of negotiations was held on 22-26 October 2007.

Chile
* Agreement on goods was signed on 18 November 2005 “immediately removing all tariffs on 92 percent of Chile’s exports.”
* Agreement on services signed on April 13, 2008.
* Agreement on services goes into effect on January 1, 2009.
* “[B]ilateral trade soared 65 percent year on year to 14.7 billion U.S. dollars in 2007, up from the 23.9 annual growth of 2006. Last year, Chilean exports to China surged 79 percent to 10.3 billion U.S. dollars, boosted by copper and grape wine trade. Meanwhile, Chinese exports to Chile jumped 42 percent to 4.4 billion U.S. dollars with strong growth in computers and communications technology, electronic products and automobiles” (Xinhua).

East Asian Free Trade Area (of ASEAN+China, Japan, Korea) Under Negotiation* The Brookings report believes this may be concluded for goods by 2015. 11.
* A services agreement may follow in 2017.
* An investments agreement may follow in 2020.

FTAAP (Free Trade Area of the Asia Pacific) Under Negotiation* The Brookings Report (11) believes that this may happen for goods by 2025.
* Services by 2027
* Investments by 2030.

Gulf Cooperation Council Under Negotiation
* The third round of negotiations was held on 17-18 January 2006.
* A fourth negotiation meeting was held on 19-22 July 2006.

Iceland Under Negotiation
* A third round of negotiations was held on 17-18 October 2007.
* Fourth round: March 2008

New Zealand
* Agreement was signed on 7 April 2008. [Two-way trade between China and New Zealand currently is worth more than $6.1 billion a year, with Chinese exports making up about 75 percent. (IHT)]
* On October 1st, 2008 “tariffs on New Zealand’s exports to China that are currently set at 5 percent or less will be cut to zero” (IHT).
* “31 percent of New Zealand’s exports to China slated for tariff-free status by 2013″ (IHT).
* Dairy and almost all (96%) of NZ’s exports should be tariff-free by 2019.

Pakistan
* Agreement on goods signed on 24 November 2006;
* Went into effect on July 1, 2007 (People’s Daily).
* 36 percent of products will be tariff free by 2010.
* 85 percent of products will be tariff free by 2013, and Phase II begins, with a goal to reduce tariffs on 90 percent of goods.
* Agreement on services under negotiation (Brookings).
* The current agreement already covers investments (People’s Daily).
* “China-Pakistan trade volume exceeded 4.3 billion dollars in 2005, representing a year-on-year increase of 39 percent. The officials said the trade deal could triple bilateral trade to 15 billion dollars within five years” (People’s Daily).

Peru Under Negotiation
* The 2007 Joint-Feasibility Study.
* The second round of negotiations held on 3-7 March 2008.
* A third round was held in May 2008.
* The fifth round was held at the end of August 2008.
* On August 26th, Peru’s foreign minister of trade and tourism stated a belief that negotiations could conclude by November, 2008.

Singapore
* The first round negotiation was held on 26 October 2006. There were a total of eight rounds.
* On September 4, 2008, negotiations for a full free trade agreement including goods, services, and investments were concluded. The agreement should be signed by October 2008 (International Herald Tribune). [Bilateral trade between Singapore and China was $63.83 billion, in 2007.]

Southern African Customs Union Under Negotiation
* Negotiation started on 29 June 2004

Feasibility StudyCosta Rica
* The 1st Joint Meeting was held on 9-11 January 2008

India
* The feasibility study on Regional Trade Agreement (RTA) concluded at the sixth meeting on 21-22 October 2007

Norway
* A feasibility study concluded on 13 December 2007

South Korea
* The 4th Joint Meeting was held on 18-20 Febuary 2008.
* December 2007 China Daily article.

Switzerland
* In July 2007, the countries agreed to study the feasibility of a free trade agreement.

From: Page 7 of Brookings report; originally People’s Republic of China Ministry of Commerce news releases; also edited and updated with data inter alia from the Brookings report and from various news sources from around the Internet.

Potential Free Trade Timeline
October 2008 – “[T]ariffs on New Zealand’s exports to China that are currently set at 5 percent or less will be cut to zero” (IHT).
October 2008 – Singapore-China Free Trade Agreement signed.
November 2008 – Peru-China Free Trade Agreement signed.
December 2008 – Agreement on investment with ASEAN signed.
January 2009 – Agreement on services with Chile goes into effect.
2010 – Phase-Out period for normal items ends for China and original ASEAN countries.
2010 – Pakistan: 36 percent of products will be tariff free.
2013 – Pakistan: 85 percent of products will be tariff free.
2013 – Phase-Out period for sensitive items ends for China and original ASEAN countries.
2013 – “31 percent of New Zealand’s exports to China slated for tariff-free status″ (IHT).
2015 – Phase-Out period for normal items ends for the newer ASEAN members (Cambodia, Laos, Myanmar, Vietnam.)
2015 – ASEAN single-market finally established.
2015 – East Asian Free Trade Area (ASEAN, Korea, China, Japan) for goods.
2017 – East Asian Free Trade Area (ASEAN, Korea, China, Japan) for services.
2019 – Dairy and almost all (96%) of New Zealand’s exports should be tariff-free by 2019.
2020 – East Asian Free Trade Area (ASEAN, Korea, China, Japan) for investments.
2020 – Phase-Out period for sensitive items ends for the newer ASEAN members (CLMV).
2025 – FTAAP for goods.
2027 – FTAAP for services.
2030 – FTAAP for investments.

On 08/08/08, as the Olympics began, Russian tanks moved into Georgia’s breakaway provinces of Abkhazia and Southern Ossetia. China’s position on the Georgian situation is interesting to consider since China has several provinces that suffer ethnic unrest (re: T###bet and Xinjiang.) Even more important, China has a breakaway province it would like to recover- Taiwan. The aftermath of the Georgian situation could have harsh consequences for international law. China has a vested interest in opposing breakaway provinces, but it also has diplomatic interests with Russia. Below, I analyze why and how the Georgia situation may significantly affect Sino-Russian relations and China’s future foreign policy.

China’s Territorial Philosophy

Due to China’s territorial worries about T$$$bet, Xinjiang, Taiwan, and other minority-zones, it might be suspected, by a casual observer, that China would reflexively support Georgia taking a hard stance against Georgia’s breakaway provinces. However, the situation in Georgia is more complicated.

China could take the “obvious” route, and side with Georgia that the breakaway provinces should hold fast to the country. Since China hassignificant interest in a good relationship with Russia, perhaps the “obvious” route is to side with Russia? Or maybe China’s best decision is to try to maintain neutrality and let the problem resolve itself?

China’s Direct Foreign Policy

Prof. Robert Ross, who has written significantly about Chinese security, thinks the Chinese could support Russia if Russia’s plans are for eventual subsumation of Abkhazia and Southern Ossetia. China could base their support on old USSR claims of influence (Bloomberg). If the provinces eventually join Russia, China’s claims on Taiwan could still be justified.

China has remained silent on the matter at the UN and on its Foreign Ministry website, merely calling for a “peaceful resolution.”

Hu Jintao and Putin met on August 9. The leaders could have discussed the developing Georgian situation, but press releases make no mention of that topic being discussed.

When the China-led Shanghai Cooperation Organization (SCO) met, Russia would have liked for SCO member-states to endorse the breakaway provinces. Instead, the SCO “called for respect for the concept of “territorial integrity,” which implies that the SCO opposes the provinces’ independence. However, the SCO may support the provinces’ eventual subsumation into Russia… Which may very well happen.

China And Georgia- What You May Not Have Known

China and Georgia have a relatively “long” and apparently relatively stable history. On April 9, 1991, Georgia declared independence. From 1992-1995, Civil War wreaked havoc in Georgia. China was one of the first countries to recognize Georgia’s independence. On “December 27, 1991, State Councilor and Foreign Minister Qian Qichen sent a message to Georgian Foreign Minister, informing him that the Chinese Government formally recognized the independence of the Republic of Georgia” (China Foreign Ministry). In June 1992, diplomatic relations began between the nations.

Comparatively, Australia did not recognize Georgia as a country until March 29, 1992. Recognition by the United States came only in April 1992, despite Georgia sending delegations to the United States from as early as 1991.

China and Georgia Trade, Compared to China and Russia Trade

China has little economic interest in supporting the tiny Caucasus country. Although ties between China and Russia might strain over the Georgian situation, China is likely to ultimately bend toward support of Russia.

The volume of China-Georgia trade has been relatively inconsequential. “In 2001, bilateral trade volume between China and Georgia stood at US$7 million, of which China’s export was US$3.71 million and import US$3.29 million” (China Foreign Ministry).

“The trade volume between China and Georgia in 2002 amounted to US$11.51 million, of which China’s export was US$8 million and import US$3.51 million” (China Foreign Ministry).

Comparatively, Sino-Russia trade was $48 billion in 2007, up 44% from 2006 (HERE).

Norling’s piece had a provocative statement; “To put it bluntly, Russia needs China more than China needs Russia and Russia’s main problem in maneuvering the relation is its weakness not China’s strength. The only lever that Russia possesses over China is energy but it is reluctant in playing this card prematurely. This is why Russia delays pipelines, does not fulfill reached agreements, and is obstructive in its energy engagements with China” (Norling, 43).

China’s Lessons

* China has an opportunity to flex its soft power, stepping in as a peacemaker and a deal maker, according to Huang Jing, a senior research fellow at the National University of Singapore’s East Asian Institute (HERE). Russia, however, seems to have blown China’s opportunity by recognizing the breakaway provinces. Will negotiations continue behind-the-scenes as China might encourage South Ossetia to be subsumed into Russia. Abkhazia, however, is a thornier issue. The Abkhazians seem to be enjoying their independence.

* China’s soft power may already be in full force. Russia’s ally Kazakhstan didn’t automatically recognize the breakaway regions and is instead calling for a multilateral solution. An article by Farkhad Sharip of theJamestown Foundation wonders; “But would or would not Nazarbayev have bowed to pressure from Medvedev if it had not been for Chinese leader Hu Jintao who rejected outright Russian attempts to impose recognition of the separatist regions as independent territories?”

* China may be best served by neutrality. China stands to lose potential trade and access to energy resources if it opposes Russia. And China would gain relatively little from helping tiny US-ally Georgia, so it is unlikely China will push for the provinces to return to Georgia. But, by waiting, China can gain influence (IHT) in Central Asia (Financial Times) and elsewhere as planned foreign investments are diverted (WSJ) from Russia to a China that is willing to engage the world instead of to belligerently confront it.

* The situation is dangerous for China’s territorial ambitions. China may take Georgia’s ethnic unrest and splittism as a justification for acting even harsher to quell ethnic separatist dissent. This could lead to frentic pushes to bring Taiwan back and increase restrictions in T$$$bet and Xinjiang. According to Professor Robert Ross, “`the lesson for China in this is that we must be all-the-more sure that we control our ethnic groups'” since the separatist conflict “‘is all the result of the inability of Russian leaders to control their country, and allowing ethnic divisions to dominate” (Bloomberg).

* Others believe the US’ lackluster defense of Georgia’s provinces could embolden China to push more against Taiwan, if China believes the military risks of intervention and “punishment” would be minimal.

* China must be watching Russia’s stock market, which took a tumble in the wake of Russia’s invasion of Georgia (Also). China values its economy and an unstable economy could lead to internal chaos. How Russian stocks rebound in coming months will certainly determine, to some degree, China’s risk-calculus in pushing against Taiwan. The less Russia is “punished” for its invasion, the less risk China will see in placing military pressure on Taiwan.

Conclusion

It is a little early to say which of “China’s Lessons” will become the most prevalent. I would like to review this situation again in a month. Preliminarily, I would postulate that China will try to leverage this situation into a soft-power net bonus, working behind-the-scenes to promote Russia subsuming the provinces and promoting themselves as a stable destination for investment. Please feel free to discuss what you think in the comments section.

Previously, I’ve presented both John McCain and Barack Obama’s statements on China. However, with recent vice-presidential picks and developments, there is new information to be considered.

While both Presidential candidates have at times “talked tough” on China, it’s important to remember that traditionally much inflammatory campaign rhetoric has been just that, rhetoric. The China Backpedal of talking tough in the election campaign, then pursuing a conciliatory relationship once in office, is well-documented.

Ultimately, however, since you (the reader) also possess interest in China, I think it’s also useful to hear some of your responses on which president you think would be

(1) best for continuing peaceful relations, and/or (2) best for long-term strategy (from America’s point of view).

As you read the analysis, feel free to retort with your own opinions.

It appears John McCain’s past interest in free trade implies he would encourage a positive relationship between heavy trading partners America and China whilst preserving American economic strength and military investments in the Asian region.

McCain appears to have a balanced opinion in regards to China. He counseled Bush to “avoid confrontations” on his Beijing Olympics trip to China, saying that some of China’s actions are “also regrettable, but I don’t think China is regressing the way that Russia is. We have a greater opportunity to work in a cooperative way with China.” McCain “hopes Bush will tell the Chinese leadership that “we understand, as the [DL] does, that T$3b$t is part of China but we hope Tibetans are not repressed or oppressed.” Importantly, McCain met relatively recently with the D$$ai L$$a in Colorado (Washington Post).

McCain’s main foreign policy focus will be on Iraq and Iran. Being a military man, McCain doubtless realizes there is little to be gained by forcing America to further overextend forces to posture against China over issues that present relatively minor relationships to immediate American interests. On the negative side, it is possible the McCain presidency will continue the dubious Bush policy of benign neglect of ASEAN and South-East Asian relations, which would allow China to increase its influence in that region.

Running-mate Palin’s foreign policy experience is slighly less than Obama’s (she hasn’t yet visited Iraq or Europe on state-trips), and regrettably there are few easily located documents on any statements tied to her positions on China.

Ultimately, a McCain presidency appears to offer continued peaceful relations with China.

Barack Obama would be pressured by both his party [Nancy Pelosi is a noted China-basher] and his own conscience and campaign rhetoric to “get tough on China.” Obama has made several tough statements on how America is “shipping jobs overseas.” If he carries through with campaign promises, Obama might work to roll back certain aspects of China-trade, perhaps creating more jobs in the United States. If he succeeds, that would certainly harm US-China relations and raise prices of goods that were formerly cheaply made-in-China, or assembled therein. At a minimum, Obama might seek to set up administrative hurdles to US-China trade, as Experience Not Logic implies in its analysis of Obama’s acceptance speech and the Democratic primary debate.

Obama’s running-mate, Joe Biden, is even more negative on China trade, saying; “If I were president, I’d shut down any imports from China, period, in terms of their toys — flat shut it down. Imagine if this was Morocco selling us these toys, we would have shut it down a year ago.”

Despite Obama’s anti-trade rhetoric, one Chinese journalist believes that because much of Obama’s expert team consists of Clinton-era officials, his relationship will be pragmatic. Still, that same journalist believes “an Obama administration would put more pressure on China, even to the point of being more likely than the Bush administration to use the WTO to confront China in court on related issues.”

On the positive side with Obama, he will probably talk to Hu Jintao, and not overtly pressure China beyond token expressions of dissatisfaction. At least, talks will happen if Obama isn’t forced to burnish an image of diplomatic weakness, like former US President Kennedy needed to do in order to establish credibility. If Obama is perceived as “weak” after having unsuccessful talks with Iran or Syria or Hamas, then he will need to regain his political capital somehow– and that somehow could be through bashing Russia or China- traditional bugaboos.

It is a little uncertain to say what Obama’s ultimate China policy relationship will be, but it is promising to note his advisory staff contains several people who possess deep knowledge concerning China. (See Below)

Obama certainly has the big names on his team, from Brooking’s Jeffery Bader to Richard Bush of Brookings; Ken Lieberthal, former NSC; Mike Lampton, SAIS; Evan Medeiros, RAND; Bob Kapp, former president of the US-China Business Council; Kevin Nealer, The Scowcroft Group; and Bob Suettinger, former NSC and CIA now consultant. Elizabeth Economy is also involved in Environmental issues.

McCain has former Deputy Secretary of State Rich Armitage, former Bush Administration defense, NSC and foreign policy officials Peter Rodman, Rick Williamson, Mike Green, the former NSC Senior Director for Asia, now at CSIS, and Dan Blumenthal, former DOD, now at AEI.

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* China Comment hopes to posit thought-provoking ideas of the sort found in Journals. Although the blog’s first appeal is to the mass market, it also aspires to conduct nuanced research. Please join our discussion about China! Content (c) 2008-10